Authors libby rittenberg 309

It is easy to make the mistake of assuming that if an activity is carried out
up to the point where marginal benefit equals marginal cost, then net
benefits must be zero. Remember that following the marginal decision rule
and equating marginal benefits and costs maximizes net benefits. It makes
the difference between total benefits and total cost as large as possible.

KEY TAKEAWAYS


Economists assume that decision makers make choices in the way that
maximizes the value of some objective.



Maximization involves determining the change in total benefit and the
change in total cost associated with each unit of an activity. These
changes are called marginal benefit and marginal cost, respectively.



If the marginal benefit of an activity exceeds the marginal cost, the
decision maker will gain by increasing the activity.



If the marginal cost of an activity exceeds the marginal benefit, the
decision maker will gain by reducing the activity.



The area under the marginal benefit curve for an activity gives its total

benefit; the area under the marginal cost curve gives the activity’s
total cost. Net benefit equals total benefit less total cost.



The marginal benefit rule tells us that we can maximize the net
benefit of any activity by choosing the quantity at which marginal
benefit equals marginal cost. At this quantity, the net benefit of the
activity is maximized.

TRY IT!
Suppose Ms. Phan still faces the exams in economics and in
accounting, and she still plans to spend a total of 5 hours studying for
the two exams. However, she revises her expectations about the
degree to which studying economics and accounting will affect her
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org

309